Rent-to-own household goods provider PerfectHome is writing off the debts of around 2,500 customers as part of a £2.1 million redress package agreed with the City watchdog.
The Financial Conduct Authority (FCA) said 37,000 customers in total will receive cash payments or have their debts written off by PerfectHome after the company failed to properly assess if its loans were affordable.
Of those, 2,425 customers whose unaffordable loans led to them defaulting will have their debts written off and will become the owners of the goods for which they originally took out the loan, the FCA said.
PerfectHome, a trading name of Temple Finance Limited, is a rent-to-own firm which provides household goods to customers on hire purchase agreements.
The West Midlands-based company only received FCA authorisation in December.
The FCA said it found that the firm's affordability assessments did not adequately take into account customer circumstances, which led to them being issued with loans they could not afford.
Some customers were charged late fees for arrears on their insurance contracts, contrary to the firm's own policy, while others paid for insurance before receiving goods or did not always receive a refund of their first payment when the agreement was cancelled.
Jonathan Davidson, executive director of supervision for retail and authorisations at the FCA, said: "Our key priority is to ensure all financial firms lend responsibly and treat consumers fairly, especially those in financial difficulties or who are vulnerable.
"Unaffordable lending is not acceptable in any circumstances. I am pleased that the firm has taken steps to address this and provide redress to those customers affected."
PerfectHome will contact all affected customers to explain the refund or balance adjustment they will receive. The FCA said customers do not need to take any action until they are contacted.
PerfectHome chief executive Mike Sweetland said: "We were authorised by the FCA in December last year. As we worked towards this, the FCA advised us that some of our historic practices did not meet the standards it expected as the new regulator of consumer credit firms.
"Our processes around theft and accidental damage insurance, cancelled sales and a smaller number of affordability checks did fail some of our customers and have all been stopped.
"We wish to say sorry to our customers and we're putting that right. Those affected will be receiving letters from me personally with information about their redress payments which will be made by cheque or balance adjustments.
"As part of our authorisation process with the FCA, we worked meticulously through all our policies and practices and made significant improvements such as the centralisation of underwriting to further improve customer credit and affordability checks - which include the assessment of customers' income and expenditure.
"After these significant changes, I can say with confidence that the issues of our past could not happen today."